After Shakedown, Overnight Markets Regain Their Calm

the S&P500 has now gone 47 days without a gain or loss of more than 1% - a feat unmatched since 1995, according to AP. There's been a lot of noise over the last couple of weeks but not much in the way of major price action/momentum for investors to get their teeth into. Just when the possibility of a major theme emerges it then seems to lose energy and along comes another period of subdued activity to restore the recent status quo. This month we've had the important ECB policy announcement, the all time low yields in many Euro bond markets, the latest FOMC hurdle, a surprise edge up in US inflation, an initially hawkish BoE Carney (retraced a bit yesterday) and renewed Geopolitical problems. In spite of all this most major equity and fixed income markets are little changed (with a slight upward bias) since Draghi's interventions.

The WSJ wrote late yesterday that the Obama administration has quietly cleared the way for the first exports of US crude oil in four decades. According to the article, two energy companies can now legally export ultra-light oil, which has become plentiful from shale oil drilling. Shipments could begin as early as August. Under current rules, companies can export refined fuel, but not crude itself. The Economist has previously written that oil exports could have wide implications for the American petroleum deficit and the US dollar. After the article hit the newswires, the US Commerce Department released a statement saying that there has been no change in policy on crude exports.

Overnight markets are having a weaker session across the board (except the US of course). Even the Nikkei is trading with a weak tone (-0.7%) seemingly unimpressed by the Third Arrow reform announcements from Prime Minister Abe yesterday (and considering in Japan the market is entirely dictated by the BOJ, perhaps they could have at least coordinated a "happy" reception of the revised Abe plan). Either that or they have largely been priced in following the sizable rally in Japanese stocks over the past month or so. Abe outlined about a dozen reforms yesterday including changes to the GPIF investment allocations and a reduction in the corporate tax rate to below 30% from the current level of 35%+. Separately, the Hang Seng Index (-0.06%) and the Shanghai Composite (-0.41%) 98closed lower as traders cited dilutive IPOs as a concern for future equity gains.

European stocks fall for a fourth day as violence in the Middle East escalated. Asian shares also dropped, while U.S. futures are little changed. Gold slips, paring last week’s 3% rise. The pound weakens for a second day.

US equity futures, after a sudden tumbling bout yesterday, have managed to reverse the broad global decline on the back of a late pick up in USDJPY, which is once again trading up to 102.000 where there is half a yard of option expiries. For those curious why the market has barely budged in recent months, look at the USDJPY which has traded within 80 pips of 102.000 for the past month.

Newsflow from US remains light with focus on today’s US May Durable Goods Orders and Weekly DoE crude inventories, while the US Treasury returns to sell USD 35bln 5yr Notes.

Prelim Barclays month end extensions show US Treasury at +0.07y (Prev. +0.12y) EQUITIES European equity markets (Euro Stoxx -0.4%) trade negatively after the Dow Jones suffered its steepest slide in a month yesterday, with negative European company news adding to the downward pressure. US stock futures sit just below unchanged after yesterday’s sell-off somewhat stabilized, with markets awaiting clues from the final US GDP print at 1330BST/0730CDT.

FX

In the currency markets, the USD trades flat against the majors amid a lack of European data releases and speakers, as focus turns to the final print of US GDP (Exp. -1.8% from -1.0%), but is not expected to result in a change to the longer-term growth story. Elsewhere, GBP/USD was seen lower amid selling by model-based investors triggering stops, although has recently staged a modest recovery to trade flat. Also of note, EUR/USD currently resides near 1.8bln due to expire at 1.3620/25 at today’s NY cut.

COMMODITIES

WTI crude futures spiked close to YTD highs at USD 107.50 on reports that the US Commerce Dept were to revise the 40yr old export ban on US oil to the international markets. The reports stemmed from conversations held between industry officials and US firms Pioneer and Enterprise Products Partners, however analysts and US officials have stated the reports are not tantamount to a change in policy – resulting in WTI crude falling back to pre-report levels well ahead of the NYMEX open.

Gold (USD 1312.30, down USD 5.8) fell from its 2-month high and Silver (USD 20.83, down USD 0.04) fell from its 3-month high in overnight trade, despite the lower close on Wall Street and geopolitical concerns, as physical buying lagged after the recent impressive price gains for the precious metals price participants out of the market, and expected options expiries for Gold, Silver and Copper add further downside pressure.

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DB's Jim Reid puts it all in perspective

There's been a lot of noise over the last couple of weeks but not much in the way of major price action/momentum for investors to get their teeth into. Just when the possibility of a major theme emerges it then seems to lose energy and along comes another period of subdued activity to restore the recent status quo. This month we've had the important ECB policy announcement, the all time low yields in many Euro bond markets, the latest FOMC hurdle, a surprise edge up in US inflation, an initially hawkish BoE Carney (retraced a bit yesterday) and renewed Geopolitical problems. In spite of all this most major equity and fixed income markets are little changed (with a slight upward bias) since Draghi's interventions.

The Geopolitics of the Middle East is continuing to hover in the background though and yesterday we saw US stocks sell off after the WSJ reported that Syrian warplanes had struck targets in the Western province of Anbar. More broadly, the article seems to suggest a widening of the Iraq conflict, saying that Syria has joined Iran in coming to the aid of the embattled Baghdad government. Tehran has deployed special forces to help protect the capital and the Iraqi cities of Najaf and Karbala according to the Journal, suggesting that the conflict has already spanned a number of borders. Earlier in the day, there were unconfirmed reports that US drones were operating in Iraq though this was rejected by the Pentagon. Nevertheless, the use of drones and other unmanned US military aircraft appears to have some popular domestic support in the US. A NY Times/CBS News poll found that 56% of respondents supported drones to assist the Iraqi government. Brent closed 0.3% higher yesterday but has reversed most of these gains earlier this morning.

The reality is that the S&P500 was already on the way down after peaking early in the US session (at around +0.27%), but the WSJ article seemed to spur a sharper pullback in risk that saw the index eventually close at -0.64%. From the perspective of the treasury market, the stronger US data and comments from the NY Fed’s Bill Dudley suggesting the possibility of rate hikes in mid-2015 were outweighed by the events in the Middle East and reports that Ukraine’s president may cancel its ceasefire. 10yr UST yields closed 5bp lower on the day, and there was heavy demand at the back of the UST curve. Indeed, there seemed to be relatively low demand for shorter bonds with 2yr bonds closing only around 0.8bp lower in yield, perhaps weighed by the comments from Dudley and a fairly lacklustre 2yr treasury auction.

Staying in the Middle East, the 6.7% fall in Dubai’s DFM index raised a few eyebrows yesterday. The selloff was sparked by construction firm Arabtec who was the first to go limit-down (-10%) which sparked fears of margin calls across a number of other stocks. However, the collateral damage across to other regional bourses was relatively contained (Abu Dhabi General -3.3%). In terms of the data, US consumer confidence rose to a post-recession high in June (85.2 vs. 82.2 prev, 83.5 expected). The gain was mostly due to an improved assessment of the present situation (85.1 vs. 80.3), as future expectations rose by a smaller amount (85.2 vs. 83.5). The labour components were also encouraging, as jobs plentiful reached a post-recession high of 14.7% vs. 14.2% prev. US new home sales for May were significantly better than expected, up +18.6% (vs +1.4% expected) to 504k which is the highest level since May 2008 (504k).

All in all, still a lot of noise, but the S&P500 has now gone 47 days without a gain or loss of more than 1% - a feat unmatched since 1995, according to AP. On that note, DB’s global economists Peter Hooper et al have just released their latest World Outlook in which they write that a remarkable calm has settled over global financial markets in recent months, with volatility indicators testing new lows, interest rates surprisingly subdued in the face of strengthening employment and inflation data, and risk appetite showing impressive signs of growth. The calm cannot last indefinitely, and the question at hand is whether the clouds on the horizon portend merely a late-summer squall or a potentially far more damaging tempest. Peter’s baseline forecast assumes the former —a manageable storm— with expectations for global growth remaining largely intact, with only a marginal downgrade to growth prospects in 2014. This broadly unchanged global picture masks some substantial revisions at the country level. Since they last updated their view in March, US growth has been marked down by almost 1 percentage point this year, in response to cold weather and other transitory negative factors in Q1. Key risks to this view are that rising inflation pressures cause the Fed to raise rates even more rapidly, or that the market reaction to Fed exit is a good deal stormier than they assumed. An abrupt shift in market expectations could mean a wrenching adjustment for investors, with significant negative spillover to the economy. In this event, the Fed would likely pause or possibly even reverse course.

Coming back to the topic of oil, the WSJ wrote late yesterday that the Obama administration has quietly cleared the way for the first exports of US crude oil in four decades. According to the article, two energy companies can now legally export ultra-light oil, which has become plentiful from shale oil drilling. Shipments could begin as early as August. Under current rules, companies can export refined fuel, but not crude itself. The Economist has previously written that oil exports could have wide implications for the American petroleum deficit and the US dollar. After the article hit the newswires, the US Commerce Department released a statement saying that there has been no change in policy on crude exports. WTI futures traded as high as +1.5% overnight on the back of the headline, but has since pared back the move to around 0.65% as we type.

Overnight markets are having a weaker session across the board. Even the Nikkei is trading with a weak tone (-0.5%) seemingly unimpressed by the Third Arrow reform announcements from Prime Minister Abe yesterday. Either that or they have largely been priced in following the sizable rally in Japanese stocks over the past month or so. Abe outlined about a dozen reforms yesterday including changes to the GPIF investment allocations and a reduction in the corporate tax rate to below 30% from the current level of 35%+. It’s a pretty quiet session elsewhere in Asia with markets mostly reacting to the geopolitical headlines yesterday.

Turning to the day ahead, there are a number of confidence surveys to be released in Germany, France and Italy. US Q1 GDP revisions and durable goods are the major data releases. The market is expecting Q1 GDP to be revised down to -1.8% QoQ. In Europe, the Bundesbank’s Weidmann speaks in Halle, Germany.